Big profits, inefficiencies driving health premiums up

Private health insurers are hitting consumers with unjustified premium increases and overly complex insurance products in their pursuit of big profits, according to a leading industry analyst.

As the Federal Government undertakes a review of the sector amid mounting complaints about the value of health insurance, Credit Suisse analyst Andrew Adams has released a scathing critique of the industry in which he argues funds are not operating efficiently, have deviated away from their core principles, and have set profit and capital targets that are unjustifiably high.

Health funds are coming under increased scrutiny over their strategy of pursuing relentless above-inflation premium increases while downgrading the quality of the cover they offer.

Health Minister Sussan Ley has launched a review of the sector after it was revealed policies covering 500,000 people had been downgraded last financial year despite surging industry profits and premium revenue.

Ms Ley said the confluence of factors suggested there was “something wrong” with the way the industry was regulated.

But AMA President Professor Brian Owler said insurers, driven by the pursuit of profit, were downgrading the cover of policyholders – often without their knowledge or full understanding – leaving many without the insurance they thought they had paid for.

At the same time as they are downgrading the cover they offer, insurers – led by Medibank Private – are looking to force private hospitals to accept responsibility for a greater share of treatments arising from medical complications.

Medibank has just struck a deal with large hospital operator Healthscope which, it is claimed, is aimed at “reducing hospital-acquired complications and avoidable readmissions”.

Professor Owler said that although every effort needed to be made to reduce complications and avoidable readmissions, insurers should not be using the pursuit of quality improvements as an excuse for cost-cutting.

“What we don’t want is punitive measures that punish patients and interfere in what would otherwise be routine clinical cases in order to save money,” he said.

There are also concerns the industry is seeking to undermine community rating, the principle under which all policyholders pay the same premium for a given policy, regardless of age, health or claims history.

It has been suggested that insurers be allowed to offer discounts for those with healthier lifestyles, such as non-smokers and the physically active, though Medibank chief George Savvides told The Australian such an approach was not financially feasible.

Instead, he suggested no-claim bonuses for those who stayed healthy and a reward for long-term members.

But such measures would discriminate against those who, through no fault of their own, became sick, and would increase the deterrent for people to seek care – potentially leading to more serious and costly ailments later on.

Like Professor Owler, Mr Adams is concerned that patients are being made to pay for pursuit of profits by insurers.

Official figures show the industry recorded a $1.1 billion after-tax profit in 2014-15, and premium revenue surged by 7.3 per cent.

In his analysis, reported in The Australian, Mr Adams pointed out that the industry delivered a 17.5 per cent return on equity – by comparison, for the major banks it is around 9.5 per cent – and held double the capital considered to be adequate.

He calculated that reducing the return on equity to 12.5 per cent could enable the industry to reduce its premium increases to just 2.5 per cent over the next three years, compared with the 7 per cent it is seeking next year alone.

Mr Adams questioned why such a heavily regulated and subsidised industry was being allowed to generate such high profits, argued the case for premium increases needed to be re-examined : “In our view, regulated price increases need to also take into account prior year performance and capital position, which could justify a period of below-inflation premium increases”.

In addition to these concerns, Mr Adams said the recent proliferation of health policies – more than 20,000 different types are on offer – had increased costs and inefficiencies in the industry, and suggested there would be some “quick and easy gains to be made by going back to basics”.

“Restricting the level of policy selection to a small number of simplified and homogenous products and reducing the excess returns being generated by the insurers themselves, will significantly assist the affordability and simplicity of private health insurance in the market,” he said.